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Venezuela: Chávez squeezes the oil firms

From The Economist

Nov 10th 2005 | CARACAS | From The Economist print edition | A forthright abuse of market power that could eventually backfire. | IF OVERHEATED rhetoric could be harnessed as an energy source, Venezuela would be well placed to survive the eventual transition to a post-oil world. "We have done nothing less than to snatch the world's biggest oil reserves from the mouth of imperialism," the oil minister, Rafael Ramírez, told an enthusiastic audience at the foreign ministry recently. In the same room, a couple of weeks earlier, a radical academic close to the army commander, General Raúl Baduel, took a contrasting line: "If we have an anti-imperialist discourse here, why are we welcoming the chairman of ChevronTexaco?"

Both were commenting on the government's decision to force foreign oil companies, at short notice, into new contracts and a new tax regime markedly tougher than those agreed in the country's oil "opening" a decade ago, since when foreign-run fields have come to produce a third to half of Venezuela's output. The new contracts remove operational control of oilfields from foreign firms and make the firms, essentially, minority partners in state-run ventures.

For the minister, and the country's avowedly socialist president, Hugo Chávez, this marks a return to sovereignty over the country's biggest asset. Others on the left, though, think even the new, tougher terms are a sell-out. Mazhar al-Shereidah, a Venezuelan oil economist of Iraqi origin, argues that the new arrangements relieve the oil firms of all risk. It is "tragi-comic", he says, that they are being given a so-called ultimatum to accept just the sort of joint-ventures that they have happily agreed elsewhere. Conservative regimes in Saudi Arabia and other Gulf states would not dream of letting foreign firms into their upstream business in this way, he says.

As for the companies, they are saying little. If they refuse to "migrate" to the new system, in which state-run Petróleos de Venezuela will have a 60-90% share plus operational control of the fields, they will have to quit the country by December 31st. So far, of 32 companies involved, 22 (mostly smaller) ones have agreed to the switch, even though the precise form of the new contracts has yet to be defined. The giants are holding out but the betting is that most will eventually sign.

Thanks to a planned increase in royalties from 1% to 30%, and tax at 50% instead of 34%, the state will henceforth receive a minimum 82.5% of profits, according to Mr Ramírez. With Venezuelan oil selling for almost $50 a barrel-up to five times the price when the original contracts were signed-and access to the world's remaining reserves at a premium, the companies can probably live with the consequences. Harder to swallow is a form of "negotiation" in which Mr Chávez announces take-it-or-leave-it terms on television, without warning.

Certainly, Mr Chávez is showing scant regard for the rule of law in unilaterally tearing up contracts, though experts say he has a bit more legal wriggle-room as regards increasing the tax rates on oil. However, the reality is that in recent years, oil firms have lost market power relative to countries with hydrocarbon reserves, and Mr Chávez's government is only doing the same as others worldwide, from Russia to North Africa. Most analysts in Venezuela, regardless of their politics, agree that some sort of redefinition of the terms of the oil "opening" was overdue: besides earning lustier profits than anyone envisaged when the contracts were first signed, the foreign oil firms have come under fire for using accounting wheezes to reduce their tax payments.

Leftist critics are promised that Venezuela's continuing dependence on foreign firms, and on the United States as the main buyer of its oil, is temporary. Venezuela is offering more crude to neighbouring countries-but at giveaway prices. America (where Venezuela owns a mid-sized oil distributor) is the nearest, most obvious paying customer. The state oil firms of allies such as Iran, Brazil and China (along with Spain's Repsol) have been contracted to quantify the heavy oil in the Orinoco belt, formerly classified as tar but now claimed as some 235 billion barrels. Along with 80 billion barrels of conventional crude, this backs Venezuela's questionable claim to own the world's biggest reserves.

Mr Chávez claimed last month that Venezuela had "a strong oil card to play on the geopolitical board" and that it would be played "against the world's roughest players, the United States." While oil demand and prices are high, he may indeed hold a trump card. But if and when prices slump, as new fields elsewhere come on stream, Venezuela's natural disadvantages-its oil is heavy and sulphurous, and more expensive to pump-combined with its cavalier treatment of foreign investors may prompt the oil firms to walk away just when Mr Chávez most needs them to maintain his country's, and his regime's, principal source of revenue.

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